Investment irony
There is currently a lot of focus on guaranteed savings products in Norway now.

A new type of investment product where you can’t loose money and have upside exposure
It was heavily marketed and sold by banks during 2002-2004. It is not so hot a product any more. Now a lot of customers say they feel they were fooled into buying these products.

How these investment products works- invest a sum of money, and you are guaranteed to get that back in five years, but you don’t get any interest off the money you invest. This interest money is used to buy options on the major stock indices around the world. These products come in a number of difficult forms, but this is the basic. The prospectus are often really complicated and even the sales clones in the banks can’t calculate what the real profit will actually be. Since it was guranteed people were also allowed to borrow money at the bank to finance buying these products.

By selling these products the banks get a good commission. Investments that have high fees or fees somehow included in the price of the products are seldom so great for the investor.

The customers say they were fooled. Examples show that if the marked increased 50% during this 5-year period, such a product would only make a profit of 17%. In fact the market had to increase a lot just to get out with any profit.

Why it is bad
This is ironic for a number of reasons:

  1. This product became popular while the stock market tanked in 2002-2003. Because you would not loose any money if the market continued down.
  2. One could bet that the people that bought this product was the same people that have been burned on mutual funds that declined in this period.
  3. When the stock rally finally comes they miss it.
  4. So first such a person would take the loss in the down market, then bet on something that will under-perform. Two bad choices.

Keep your investment ship on a steady course
The morale is: Be patient. Be able to tolerate loss. The good long term investors don’t chaise the most popular. Switching stocks or investment products often ends up with underperforming the market. Being ultra long term in some quality investments is often the best.